Different types of interest charges apply when you use your credit card in different ways. Here’s an overview of the main types:
Purchase rates (Annual percentage rate, 'APR'). These charges are for standard purchasing costs, such as when you go to the shops, get groceries, or when you pay a bill online. You can minimise these charges by opting to use a standard savings/transaction account card in lieu of a credit card for everyday transactions.
Cash advance rates. This is the interest you’re charged on cash transactions. You can avoid this by not using your credit card to withdraw cash from ATMs or at the supermarket check-out, or for purchasing foreign currency or performing international money transfers.
If cash advances are made using the card, the interest rate might be higher. Interest is also charged on cash advances straight away, so it will always cost you more than if you pay with cash.
Note that the interest rate is not the only charge associated with making a cash advance – there’s also a cash advance fee. This can be a flat fee or a percentage fee based on how much cash you withdraw.
Balance transfer deals. Paying off the balance transfer amount within the agreed period gives you the full benefit of the deal. If you don’t - the balance is often charged at the standard interest rate or the cash advance rate (which may be much higher). The terms and conditions can be different for each balance transfer deal so read the fine print.
If you get a credit card balance transfer, cancel your old card (you can do this online) and set up a plan to repay the transferred balance within the agreed period.
Interest-free periods. This varies amongst financial institutions, but is usually 44 or 55 days and gives you a chance to pay off your account in full before the institution charges any interest.
Introductory or Promotional. Some credit cards offer an introductory or promotional APR for a limited time. This lower rate is often provided as an incentive to attract new cardholders or encourage balance transfers. After the promotional period ends, the APR will revert to the regular rate specified in the card agreement.
Exceptions apply - such as when you make a cash advance or a balance transfer. In that case the financial institution will start charging you interest immediately.
Credit cards with an interest-free period often have higher annual fees. But if you pay off your debt within the interest-free period, you’ll avoid paying interest, so the higher fee may be worth it.
If you think you won’t pay off your outstanding balance every month, go for a card with no interest-free days. You’ll usually pay lower annual fees and a lower rate of interest, either from the day of purchase or the day your monthly statement is issued.
It's important to carefully review the terms and conditions of your credit card agreement to understand the different types of interest charges that may apply.
By paying your credit card balance in full each month by the due date, you can avoid interest charges altogether. However, if you carry a balance, it's wise to compare credit cards, consider their annual percentage rate (APR), and understand the impact of interest on your finances.